Covid-19 and the Economic Impact

Published: Posted on

By Professor John Bryson
Department of Strategy and  International Business, University of Birmingham

The current mantra is that we are living in interesting or even crazy times in which everyday living is being turned upside down. During this time a handshake or a cough could result in illness, or even death, and widespread transmission of Covid-19.

Yesterday, Boris Johnson, declared that everyone in the UK should avoid “non-essential” travel and contact with others to curb Covid-19. This advice includes working from home where this is possible and avoiding gatherings and crowded places, such as pubs, clubs and theatres.

All governments during this time of crisis need to balance the tensions between maintaining everyday living, including economic activity, against health outcomes. This is a very difficult task and is one that is continually changing. It is also a task that requires legislation combined with behavioural nudges to alter human behaviour.

Yesterday, the hospitality industry, combined with large parts of the service sector, called for emergency assistance. Although, material goods can be stored and sold at a later date, this is not the case for some types of service products. Manufacturers of physical goods will experience cashflow problems, as well as operational and financial issues, related to the inability of consumers to purchase some material goods now. There are some exceptions here including seasonal and fast fashion clothing.

Why will some service sectors be disproportionately impacted by Covid-19?

The explanation is in the six differences that exist between service products and material goods (see table below). There are two critically important differences that mean that service sector businesses will be disproportionately impacted by Covid-19. First, the hospitality and personal care industries provide products that are co-created between consumers and suppliers at the same time. Second, these types of facing-based service experiences cannot be stored or returned for refunds. This is the critical point, a bar, hotel, restaurant, theatre, hairdresser, airline and lawyer is unable to store the time and space required to sell a service and sell it at some future time. Thus, a vacant hotel room is a service that can never be resold as the opportunity to sell has been lost for ever.

There are all sorts of important impacts to consider here. Service employees, in many of these service industries, are amongst the lowest paid with many working on part-time or gig-economy style contracts. These are employees with no ability to save for the future. It is also the case, that many of these service businesses are more marginal businesses that have been unable to accumulate cash reserves to cover unknown eventualities. Technically, all households and companies should have cash reserves to cover between 3 and 6 months of average expenditure.

The difference between material goods and services implies that government support for some types of service businesses must take the form of grants rather than loans. These businesses will never be able to recover their lost business. For producers of some types of material goods, loans and other fiscal mechanisms will be suitable.

What will happen to our organisation dependant on charitable income? 

Media and political debates are never inclusive. They are driven by those in a society who shout the loudest and are well-connected. It is important to consider who is excluded from these debates. Here perhaps one should remember organisations like the National Trust, English Heritage and the National Gardens Scheme (NGS). These are heritage-based leisure services that depend on retired volunteers and visitor income. The NGS provides visitors with access to over 3,700 private gardens in England and Wales, and in 2019 donated £58 million to nursing and health charities including Macmillan Cancer Support, Marie Curie, Hospice UK and The Queen’s Nursing Institute. Covid-19 will reduce income to support charities, including that provided by the NGS and other charitable funding-raising activities and income generated from running charity shops.

During these unusual times, it is important to identify and understand the multifarious and complex impacts that Covid-19 will have across the UK economy Ultimately, the key challenge is to ensure the safety of all citizens including the ability of households to support themselves now and in the future.

Differences between service products and material goods

Service Products Material Goods
Intangible – difficult to see and compare. For marketing purposes, there may be emphasis on branding, or some strategy to connect consumers with the ‘product’. Tangible – can be seen, assessed and compared with one another. But, may include services that are intangible.
An experience based on a relationship or a service encounter in which some transformation will have occurred – a change of state, but with no exchange of a physical artefact. Satisfy a need or a want involving a physical exchange – the ownership of a good, a thing or an artefact.
Many different choices of provider, but the nature of the service might be the same. A visit to a general practitioner (GP) should produce the same outcome as any visit to any GP. Many choices of artefacts – colour, style, size, fashion, raw materials.
Very difficult to assess quality without using some form of proxy – branding, third party referral. Never certain that the service will be the best that could be obtained. Quality can be assessed through direct comparison of the physical good. A test drive of a car or the outcome from using a product.
Much harder to return a service as the service is consumed during the point of delivery. A material good can be returned for a refund or a replacement.
A service encounter cannot be stored. A service encounter that has no customer cannot be stored. Thus, a hairdresser or a lawyer with no client appointments is unable to store this time and sell it at some time in the future. A vacant hotel room is a service that can never be resold in the future. Material goods can be stored and sold at some later date.

Leave a Reply

Your email address will not be published.